Pritchard bemoans the horrors of falling prices and says "There is a technical
solution to this. It is called QE. The European Central Bank can lift the
entire EMU system off the reefs by launching a monetary blitz to meet its
own M3 growth target of 4.5pc."

Pritchard ignores the fact that equity prices are back in bubble land. He
ignores the fact that QE did not bring inflation to Japan. He ignores the fact
that consumers desperately need falling prices. He ignores the fact that falling
consumer prices do not stop consumers from buying anything.

Pritchard complains "French President François Hollande must now
pay the price for kowtowing to the contraction polices of the eurozone."

Pritchard knows full well France is bound by eurozone policies. The only way
France cannot "kowtow to the contraction polices of the eurozone" is
if France leaves the eurozone. But Pritchard never mentions that. Instead he
whines about falling prices.

One Centrally Bad Idea

In the real world, people have to eat. They have to buy gasoline for their
cars. They have to buy clothes when they wear out. They have to heat their
homes.

Those are relatively inelastic demands.

But there is also no evidence consumers will hold off for long on discretionary
spending either. Every Christmas, shoppers line up for bargains. People continue
to upgrade TVs, computers, monitors as they wear out, or simply because prices
are lower and quality is up since they last bought.

In other words, people buy when bargains are many and stop buying when bargains
are few.

Living Wages

Pritchard's solution is the same as that of many charlatans before him: Force
prices up.

The Fed succeeded. As a result, people now bitch and moan about "living wages".
Of course "living wages" are a moving target. Force prices higher and the more
it takes to keep up with them.

People want for $15 an hour for standing behind a cash register and handing
you a sack of the worst food money can buy. It's ridiculous.

Hardly anyone ever points out the fact that wages have not kept up with inflation
precisely because the Fed has done exactly what Pritchard wants.

People do not blame the Fed, nor do they blame economic illiterates like Pritchard.
Instead they blame allegedly evil corporations like McDonalds and Walmart.

Actually, the world needs more Walmarts. I hope Walmart enters the health-care
business in a big way. Costs would come down overnight. It would also be great
if Walmart could directly compete with banks on financial services.

Costs Rising Faster than Wages

The problem is not that wages are too low, but rather costs rise faster than
wages. Why does that happen? Because of the very central bank polices espoused
by Monetarists like Pritchard.

Pritchard and others will note that falling home prices will slow bank lending
and consumer credit. That is correct. OK, but what's the real problem?

The real problem is monetary inflation artificially jacked up the prices of
assets (homes, cars, equities) upon which unsustainable loans were made. Rather
than admitting that simple and obvious fact, Monetarists prose the solution
is still more monetary printing which will do nothing but create even bigger
asset bubbles.

Brief History

Monetarists act on the theory falling prices are a bad idea

The Fed prints money and holds rates too low

Housing bubble builds

Medical and education prices soar

Student loans soar to "help" the students

Because housing is not affordable numerous affordable housing programs
appear causing still more unwarranted housing demand. Few see the bubble
because housing is not in the CPI

Housing crashes

The affordable housing advocates are abhorred by falling prices

Fed bails out banks and steps in to support housing prices

Income inequality soars

Students remain stuck with debt

Because of one idiotic notion, that "falling prices are a bad thing", the
Fed has generally managed to keep the CPI rising, with some things going up
much faster than others.

In response to uneven price inflation, we have seen numerous "affordable housing" programs,
massive student aid programs, bank bailouts at taxpayer expense, Obamacare
to make medical insurance affordable, cash for clunkers, Abenomics in Japan,
and countless other economic idiocies.

People propose bad idea after bad idea simply to fix problems caused by the
previous bad idea. This is corollary six to the Law
of Bad Ideas.

Law of Bad Ideas Corollary Six: Bad ideas lead to more bad ideas to
fix problems caused by previous bad ideas.

Pritchard, like many before him and countless others yet to come, want higher
inflation rates. Here is a table I put together that shows the silliness of
it all.

Effect of Inflation Over Time

Year

2% AnnualInflation

4% AnnualInflation

6% AnnualInflation

10% AnnualInflation

1

100.00

100.00

100.00

100.00

2

102.00

104.00

106.00

110.00

3

104.04

108.16

112.36

121.00

4

106.12

112.49

119.10

133.10

5

108.24

116.99

126.25

146.41

6

110.41

121.67

133.82

161.05

7

112.62

126.53

141.85

177.16

8

114.87

131.59

150.36

194.87

9

117.17

136.86

159.38

214.36

10

119.51

142.33

168.95

235.79

11

121.90

148.02

179.08

259.37

12

124.34

153.95

189.83

285.31

13

126.82

160.10

201.22

313.84

14

129.36

166.51

213.29

345.23

15

131.95

173.17

226.09

379.75

16

134.59

180.09

239.66

417.72

17

137.28

187.30

254.04

459.50

18

140.02

194.79

269.28

505.45

19

142.82

202.58

285.43

555.99

20

145.68

210.68

302.56

611.59

21

148.59

219.11

320.71

672.75

22

151.57

227.88

339.96

740.02

23

154.60

236.99

360.35

814.03

24

157.69

246.47

381.97

895.43

25

160.84

256.33

404.89

984.97

26

164.06

266.58

429.19

1083.47

27

167.34

277.25

454.94

1191.82

28

170.69

288.34

482.23

1311.00

29

174.10

299.87

511.17

1442.10

30

177.58

311.87

541.84

1586.31

31

181.14

324.34

574.35

1744.94

32

184.76

337.31

608.81

1919.43

33

188.45

350.81

645.34

2111.38

34

192.22

364.84

684.06

2322.52

35

196.07

379.43

725.10

2554.77

36

199.99

394.61

768.61

2810.24

37

203.99

410.39

814.73

3091.27

38

208.07

426.81

863.61

3400.39

39

212.23

443.88

915.43

3740.43

40

216.47

461.64

970.35

4114.48

41

220.80

480.10

1028.57

4525.93

42

225.22

499.31

1090.29

4978.52

43

229.72

519.28

1155.70

5476.37

44

234.32

540.05

1225.05

6024.01

45

239.01

561.65

1298.55

6626.41

46

243.79

584.12

1376.46

7289.05

47

248.66

607.48

1459.05

8017.95

48

253.63

631.78

1546.59

8819.75

49

258.71

657.05

1639.39

9701.72

50

263.88

683.33

1737.75

10671.90

The above table shows what the price of something that costs $100 in year
one will cost 49 years later at various interest rates.

Non of these inflation charlatans discuss what happen if wages do not keep
up. Nor do they discuss the incentives businesses have to outsource jobs or
automate because of high wages.

Amazingly, many people in academic wonderland are not satisfied with 2% annual
inflation. They want 4% inflation or higher. For example, Laurence Ball at
John Hopkins University claims to make a Case
for Four Percent Inflation.

Ball is "grateful for suggestions from Olivier Blanchard, Daniel Leigh,
Gregory Mankiw, and Richard Miller. This paper is prepared for the Central
Bank Review, published by the Central Bank of the Republic of Turkey."

His paper was written in April 2013.

How is the Turkish Lira doing since that paper came out? Let's take a look.

Hmm. Once inflation steps in it seems difficult to turn it off.

Ball cited Gregory Mankiw, an economic professor at Harvard, who had an even
more inane idea of drawing a number out of the hat every year and making currency
ending in that digit worthless.

The effect would be 10% price inflation and lord only knows what asset price
inflation would occur were Makniw to get his way.

Although there is strong evidence that consumers will hold off making asset
purchases (homes, stocks, bonds), when asset prices fall, there is not a shred
of evidence of a meaningful reduction in consumer purchases due to falling
consumer prices.

The irony is that QE tends to foster asset bubbles that ultimately crash,
not a price rise in general goods.

Central banks in general, and the Fed in particular, are excellent examples
of those in power, hell bent on implementing various bad ideas.

In yet another irony in this madness, monetarist polices benefit those with
first access to money, namely the banks and the already wealthy. Yet the same
academics screaming for higher inflation are typically the same ones screaming
about income inequality.

The amount of damage caused by one central thesis "falling prices are a bad
thing" is staggering. And to fix problems inherent in that central thesis,
countless other bad ideas are sure to follow.